As budget negotiations go down to the wire, the Reagan Administration and Congress are at least broaching the idea of cutting or postponing cost of living adjustments--COLAs--for Social Security in order to reduce the deficit.
It's a tough decision and a politically sensitive one, and for that reason will probably be avoided. But it won't be the last time you'll hear talk of using the Social Security trust fund, from which retirement benefits are paid, to finance other government needs.
The way budget negotiators saw it working this time is that COLA payments to Social Security recipients, to offset this year's 4% inflation, would be cut by 2% or postponed for three months. Doing either would retain roughly $2 billion to $4.6 billion in the Social Security trust fund and therefore help to close the overall government deficit--which is more than $150 billion. Short term, the effect would be slight on all concerned.
But the long-term effects of limiting COLAs to less than the increase in the consumer price index would be enormous. Over the years, it would add trillions of dollars to the surplus that is now building in Social Security because the number of active workers paying into the trust fund is far larger than the number of retirees collecting benefits.
And those trillions, in turn, could assure that the trust fund would be solvent in the next century, explains Michael Boskin of Stanford University, author of "Too Many Promises: The Uncertain Future of Social Security." That's when the worker-retiree ratio changes as the huge numbers of people born in the late 1940s and '50s--the baby boomers--come to retirement age.
So a tough decision now could be best for the long term.
But it's not a simple matter. Any cut in COLAs would have to be restored to low-income people, Boskin points out. Others fear that once politicians find a way of dipping into Social Security, they will come back again and again like someone going to the family sugar bowl for $5 until payday. And, of course, the politicians fear the ballot-box reaction of more than 30 million current retirees.
But just because decisions are difficult is no reason to avoid them. Doing that is what got the country into this budget mess in the first place.
It's a long story, and one chapter begins when the Reagan Administration came to office in 1981. At that time, the U.S. military needed a concerted buildup after a decade in which inflation and post-Vietnam letdown had diminished its budgets. Economists in 1980 saw the coming decade as a time when the civilian economy would go on short rations so that available resources could go to the military.
Not First to Flinch
But it didn't happen because the Reagan Administration chose to have butter as well as guns. It was afraid to ask the American voters to cinch in their belts. So it cut taxes to allow for a growing civilian economy while at the same time using deficit financing--borrowed money--for the military buildup.
It wasn't the first administration to flinch. In the 1960s, President Lyndon B. Johnson refused to ask Congress for a tax increase to fight the war in Vietnam--because he feared a tax debate becoming a referendum on the war. So the government stretched the economy to pay for a war and peacetime prosperity at the same time.
The result was the inflation of the 1970s that led, ultimately, to adjusting Social Security for inflation and paying COLAs so that benefits wouldn't be wiped out. And that led to the near bankruptcy of Social Security, which led to the reforms of 1983 that raised Social Security taxes and put the system back in good shape--but avoided dealing with the shortfall expected when the baby boomers hit the system in the 21st Century.
So what is likely to happen now? Long term, the idea of adjusting Social Security benefits based on need, or means, is gaining advocates. Alicia Munnell, an expert on pensions and author of "The Future of Social Security," believes that taxes should be raised on the benefits of the better off. Stanford's Boskin suggests a two-tier Social Security that would tie most benefits directly to taxes paid, but pay others on the basis of need in a system of elderly welfare.
Meanwhile, Social Security probably won't be touched this year, but for the future all bets are off. Its surpluses will almost certainly be dipped into before the government's deficit is totally eliminated. And, if it is done fairly, with burdens spread on all age groups, that's the way it should be.
Because the alternative of keeping Social Security--the second-largest federal program after defense--off the table not only flies in the face of logic and arithmetic, but risks setting the generations against each other.
And flinching at problems hasn't worked in the past 20 years anyhow.